Is There a Structural Break in Equilibrium Velocity in the Euro Area?

45 Pages Posted: 21 Oct 2010

See all articles by Christian Bordes

Christian Bordes

affiliation not provided to SSRN

Laurent Clerc

Banque de France

Vêlayoudom Marimoutou

Université de la Mediterraneé

Date Written: February 2007

Abstract

We investigate the stability of M3 income velocity in the euro area. We apply a set of breakpoint procedures to examine this issue and conclude that at least one structural change occurred around 2000-2001. We also find evidence of another structural break around 1992-1993. These two breaks seem to affect both the level and the slope of the income velocity of M3. We then estimate a model of equilibrium velocity that factors in the opportunity cost of M3, along the lines suggested by Orphanides and Porter (2000). Here again, we find some evidence of instability in equilibrium velocity. Given the importance of the assumption of stable velocity trends for both the derivation of the reference value and the two-pillar strategy of the Eurosystem, these findings question the relevance of some excess liquidity indicators directly computed from the reference value and may call for some adjustments in the conduct of the ECB's monetary policy.

Keywords: M3 velocity, Breakpoint tests, ECB

JEL Classification: E3, E5

Suggested Citation

Bordes, Christian and Clerc, Laurent and Marimoutou, Vêlayoudom, Is There a Structural Break in Equilibrium Velocity in the Euro Area? (February 2007). Banque de France Working Paper No. 165, Available at SSRN: https://ssrn.com/abstract=1694523 or http://dx.doi.org/10.2139/ssrn.1694523

Christian Bordes (Contact Author)

affiliation not provided to SSRN ( email )

No Address Available

Laurent Clerc

Banque de France ( email )

Paris
France

Vêlayoudom Marimoutou

Université de la Mediterraneé ( email )

GREQAM
Centre de la Vieille Charite
13002 Marseille
France

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